Table of Contents
- What is supply?
- Types of supply
- The relationship between supply and stock
- Determinants of supply (factors affecting supply)
- The law of supply
- Supply schedule
- Supply curve
- Changes in supply and changes in quantity supplied
- Elasticity of supply
- Supply and demand
What is supply?
Supply in Economics is the total amount of a particular product or service that is readily obtainable to consumers. It is a major economic concept that represents the number of goods and services that a producer is willing and able to offer for sale at a given price within a specific period of time. We will also see that it relates closely to the demand for products and services at a given price. Generally, supply will rise when prices rise because every business firm aims to maximize profit. It is not the same thing as that product that exists or the total number of that product a firm produces. It basically has to do with the part of the total finished products that the business firm offers for sale at the ruling market price. This is what constitutes the supply for that product.
For example, a biscuit producing firm produces 10000 cartons of biscuits and is willing to offer 5000 cartons for sale at a particular market price within that period. We will say that the supply of biscuits by that firm is 5000 cartons of biscuits.
We can see the relationship between the products available for consumers at a different range of prices when displayed on a graph (called the supply curve). This implies that the concept is a relative term and we refer to it concerning time and price. That means that it makes no economic sense to define the term without referring to time and price.
We can represent supply in mathematical expressions (formulas) under microeconomics. The supply function and equations display the relationship between supply and the factors influencing it or its determinants. Apart from other factors, the inflation rate influences this economic concept as well.
Types of supply
We shall identify the different types of supply on two bases, that is based on geographical and based on the combination of products.
A) Based on geographical location
This is a supply of goods and services whereby the supplier and the place where the place of supply are in the same geographical location. It can either be in the same state or the same territory.
The supplier and the place of supply are not in the same geographical location. That is two different states, two different union territories, or between a state and a union territory. It also has to do with the importation or the exportation of goods and services.
B) Based on the combination and types of products
This means the availability (for sale) of commodities that can serve multiple purposes, commodities that attend to more than one needs. For example, people use milk to bake, for sick people, and for making candy. Another example is coal which serves as a domestic cooking fuel, serves in bakeries, and the railway transportation company.
Joint (or complementary)
This is when a firm supplies commodities jointly, that is the production and release of two or more commodities from one source. An increase in the production and the demand of commodity will lead to an increase in the production of other complementary products by the same firm. An example is a firm producing both cooking gas and cooking pots.
This means that two or more firms are supplying goods or services together for a single price. they price the products as one and because of that, they tax them as one.
We can also call it short period supply, day-to-day supply, or daily supply. As the name implies, business firms do not release goods according to the demand for the goods by the consumers. They release the goods according to their availability.
For example, the supply of fish and provisions. Most times, suppliers do not wait for consumers to demand these products before bringing them out to the market.
This is within a short period whereby firms meet the demand for their goods according to availability. In other words, a firm cannot meet demands based on the requirements of the consumers.
Here, firms have sufficient time to meet the demands of the purchasers by manufacturing the products and supplying them to the market.
This is a repeated supply or provision of goods and services firms do periodically. We consider this complete only when the contract has come to an end. That is if one party decides to put it to an end.
In this instance, firms release products to the market on a competitive basis. They release many commodities and of different brands and types to satisfy a particular want. Examples are Kerosene and gas, fish and meat, butter and margarine, etc.
The relationship between supply and stock
The first relationship that exists here is that stock is the first factor that determines supply. The ability of a film to supply products depends on the availability of stock. Stock determines actual supply, it can be part of the stock or the whole stock available. The number of goods a firm is willing to offer for sale cannot exceed the stock available at a time. Stock is usually the outcome of production. this implies that an increase in production leads to a potential increase in supply
Determinants of supply (factors affecting supply)
Cost of production
A firm will certainly have a new supply schedule if its cost of production changes. If the cost of inputs such as land, labor, and capital increases, the firm will demand less of them. This implies that there will be less production and supply of these commodities to the market. If these inputs decrease in price, the firm will be willing to buy more of them. When there is more demand for these factors, there will be a corresponding increase in production and sales of the products to the market.
The price of the commodity
Price is important in determining the quantity supplied. Firms are willing to offer more of their commodities for sale at higher prices than when they are at lower prices.
Weather and other natural conditions
The availability of agricultural products depends on natural and climatic conditions such as rainfall and temperature. A change in the natural factors leads to a change in the number of products available for sale. Adverse weather conditions lead to poor growth of crops and other farm products. Natural factors such as flood, drought, storms, pests, and diseases destroy crops thereby reducing supply.
An improved method of production tends to increase supply. New inventions, introducing more efficient machines, organizational improvements, and more skills share in improving the productivity of firms. For example, if there is an invention of the new machine that increases output per time and at a lower cost, there will be an increase in supply. Inefficiency on the other hand leads to low output and a decrease in supply.
Number of producers
A change in the number of producers will lead to a consequent change in the quantity supplied of a commodity. If the number of producers increases, there tends to be an increase in the total quantity supplied. On the other hand, a decrease in the number of producers can lead to a decrease in the quantity in the quantity supplied of a commodity.
government policies such as taxation, subsidies, industrial policies, and fiscal policies can affect a change in the volume of production. When taxation on commodities increases, there will be an increase in the cost of production. An increase in the cost of production will lead to a corresponding increase in the price of the commodity. High tax rates discourage large-scale production thereby leading to a decrease in the quantity supplied. on the other hand, low tax rates encourage firms to produce on a large scale. Subsidies also encourage more production of commodities, it provides a production incentive.
Prices of other commodities
Producers tend to switch to the production of goods that have higher prices and stop producing commodities with low prices. For example, when the price of rice increases, some farmers may switch from producing wheat to producing rice. The quantity supplied of rice will increase while that of wheat will reduce.
The producer’s objective
The goal of a producer in starting a business will definitely influence his production. If his aim is towards maximizing profit, he will produce more of that commodity and increase the quantity supplied when it is in high demand. A producer will not care to increase his output if his objective is not to maximize profit. For example, he only wants to have his name in the business.
New sources of raw materials
When new sources of raw materials are available, there will be an increased output and a corresponding increase in the quantity supplied. For example, if a producer of soap discovers that he can use some herbs in making soap, his supply of soap may increase.
Seller’s expectation about future prices also affects the quantity supplied of a commodity. If he expects the price to rise in the future, he will retain his stock in which there will be less quantity supplied. He will decide to release his stock when the price increases.
The nature of goods
When the goods are perishable, the supply is perfectly inelastic. This is because the goods have to be disposed of irrespective of the price to avoid getting rotten. If a producer can store the stock, then the supply will be fairly elastic.
During periods of civil unrest, there is usually a great interruption/disturbance in manufacturing processes. This leads to a drastic decrease in the production and the quantity supplied of commodities.
When a producer faces difficulty in transporting his products to the market, there will likely be a temporary decrease in supply. At this point, even when the prices are rising, the transport challenge restricts the movement of these products to the marketplace. Accidents occurring on transit also restrict the quantity supplied.
The law of supply
The law of supply states that all things being equal, the quantity of goods and services that a supplier offers increases as the price increases. The quantity of goods and services a supplier offers decreases as the price decreases. The law says that suppliers always attempt to increase or maximize their profits by increasing the quantity supplied as price increases. In other words, higher prices induce suppliers to produce more.
Also in the law of supply, when a producer increases the quantity supplied of his products, prices will decrease, and when the quantity supplied decreases, the prices will increase. The theory also assumes that every other factor increases
Assumptions of the law of supply
- The following are the assumptions of the law of supply;
- The producer is a rational being.
- The income of the buyers and the sellers do not change.
- Other natural factors remain unchanged.
- The time period is short.
- The commodities are measurable and available in small units.
- The technology is constant.
- Consumers’ tastes and preferences do not change.
- Over time, the cost of all factors of production does not change.
- The expectations of the producers and government policies remain unchanged over time.
The supply schedule is a tabular representation of the extent of supply at different prices. It is a table that shows the relationship between and price. In other words, it shows the various quantity supplied of a commodity that a producer is willing to sell at different prices, at a specific period of time. Two types of supply schedules exist namely;
- The individual supply schedule
- The market supply schedule
The individual supply schedule
An individual supply schedule shows the different quantities of a commodity an individual seller is willing to offer for sale at different prices. This is usually at a specific period of time. Here is an example of an individual supply schedule;
Price per unit ($)
Quantity supplied (per time)
Individual supply schedule
The table shows that the supplier is willing to offer more commodities for sale at a higher price and less at a lower price
The market supply schedule
This is a table that shows the total number of a commodity that all the sellers of that commodity are willing to offer for sale at different prices. This is also within a specific period of time. It combines all the individual schedules of all suppliers of a specific commodity. Here is an example of a market supply schedule;
|Price per unit ($)||Quantity supplied by individuals||Total quantity supplied (per time)|
Market supply schedule
The table shows the relationship between the different prices of a commodity and the quantity supplied by all the sellers of that commodity at each price. Here we assumed that we have only four suppliers (A, B, C, and D) of a particular commodity in the market. As stated in the law of supply, the table clearly shows that suppliers/sellers are willing to offer more of their commodities for sale at higher prices and less at lower prices.
A supply curve is the graphical or a diagrammatic representation of the supply schedule. We can represent both the individual and the market supply schedule in a graphical form to show the individual and the market supply curve respectively. Unlike the demand curve, the supply curve slopes upward from the left to the right (a positive slope). This slope implies that the quantity supplied of a commodity increases with an increasing price. On the other hand, it decreases with a decreasing price.
Abnormal (or exceptional) supply curves
Normally, a supply curve has a positive slope, an upward slope from the left to the right. An abnormal curve violates the first law of supply, stating that sellers are willing to offer more commodities for sale at higher prices and less at lower prices. We can as well call it a regressive or a backward sloping supply curve. This is because it does not slope upward from the left to the right. Here, it shows that suppliers offer more quantities of their commodities at lower prices for sale at lower prices. A decrease in price then leads to more quantity supplied. It is a negative situation of supply.
Reasons for abnormal supply curves
The following factors lead to abnormal supplies;
Short-run supply of agricultural products
It is difficult to increase the supply of agricultural products in the short run no matter the increase in price. For example, the interval between the planting and harvesting of crops like coffee is long. In cases whereby the price of cocoa rises and there are no sufficient producers of that crop, the quantity supplied remains the same. This is because there are no many producers of coffee and the available producer has to wait for as long as four years for his coffee to be due. The quantity produced is a fixed one already. For this supplier to offer more coffee for sale, he has to produce more coffee which will take a long period of time to ripe. This situation may lead to him supplying more of his crops at a lower price and less at a higher price.
Long-run supply of fixed assets
Even though it may be possible to increase the supply of some lands in the short run, its supply is fixed in the long run. It has a relatively fixed quantity as an input. For example, we can increase things like land reclamation, irrigation, or improve soil fertility. We can also increase the quantity supplied of mineral resources but it cannot continue over a long period of time. This is because its supply tends to be exhausted in the long run. The total quantity of mineral resources we get from land is fixed. This shows an example of an inelastic supply curve. In essence, extreme cases of elasticity of supply cause a curve to become abnormal.
Sometimes when a monopolist decides to withhold his products even when prices are rising to further push prices up, it can cause an abnormality. Sometimes in the process of doing this, prices may fall down instead. At that point, the supplier may be forced to release his products for sale.
At first, labor increases its efforts and the length of time they are ready to work when wages increase. At a certain stage, labor will be unwilling to increase its effort and length of time. Here they reduce the length of work at higher wages which causes the curve to have more than one slope. A curve that has more than one slope is also known as a backward-sloping supply curve.
A continuous change in price
If suppliers fear that prices will fall further in the future, they will sell more of their commodities at lower prices at the present. Sometimes they sell less of their commodities at higher prices when they think that prices will rise further. This leads to a negative sloping which is the same as the normal demand curve.
Changes in supply and changes in quantity supplied
Changes in supply
Talking about changes in supply, the curve moves entirely to a new position. This indicates that the supplier supplies more or less of his commodity at each of the old prices. This leads to an entirely new supply schedule and curve. Other factors influencing supply aside from the price of the commodity lead to this occurrence. It comes in two types namely; increase in supply and decrease in supply. In the case of an increase, the curve shifts to the right showing that a seller supplies more of the commodity at the old price. This usually happens as a result of favorable changes in other factors aside from the price of the commodity. In the case of a decrease, the curve shifts to the left. This indicates that the supplier supplies less of the commodity at each old price. It usually happens as a result of an unfavorable change in other factors affecting supply aside from price.
Changes in quantity supplied
This is different from changes in supply because the curve does not shift. It has to do with the movement along a particular supply curve. Here, the price of the commodity is the major determinant where a supplier supplies more of the commodity at a higher price and less at a lower price. It also consists of two types, an increase in the quantity supplied and a decrease in the quantity supplied. An increase in the price of the commodity leads to an increase in the quantity supplied while a decrease in the price of the commodity leads to a decrease in the quantity supplied.
Elasticity of supply
The elasticity of supply is the degree of responsiveness of supply to the changes in price. Supply is elastic when a small change in price leads to more change in the quantity supplied while it is inelastic when a change in price does not lead to any change in the quantity supplied. It is unitary elastic when the percentage change in price is equal to the percentage change in the quantity supplied.
Supply and demand
The trends of supply and demand form the basis of the modern economy. Each specific product and service has its own supply and demand pattern on the basis of price, utility, and personal preference. If more people are willing to pay for a product, then producers will increase the quantity supplied. The price of a product will fall as the supply increases with the same level of demand. In ideal terms, markets will get to a point of equilibrium where supply equals demand. That is, no excess supply over demand and no excess demand oversupply. At this point, consumers maximize their utility while producers maximize their profit. Usually, the supply curve shows the relationship between the price of the product and the quantity supplied of the product.
Chyou is a published author who focuses on the field of international business. After an established career facilitating mergers and acquisitions for medium to large corporations, Chyou turned to writing to help students better understand international business concepts.